10 June 1981 Income Tax Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

June 10, 1981

J.F. Oulton (613) 995-1787

Attention: XXXX

Dear

This is in reply to your letter dated April 15, 1981 wherein you requested an advance income tax ruling in connection with promoting the formation of an unspecified number of personal service corporations. As explained in our telephone conversation of May 26, 1981 we are unable to provide an advance income tax ruling in situations of this nature where there are unspecified taxpayers involved and the consequence of each doctor entering into the arrangement is not known. Reference may be made to paragraphs 3 and 4 of Information Circular 70-6R dated December 18, 1978 in this connection. However, we will give an opinion as set forth below:

Our understanding of the typical arrangement which you have in mind is as follows:

1. The proposed service corporations (herein SC Ltd.) may be located in any or all Provinces of Canada.

2. The spouse, some other relative or a friend of a practising physician will be the sole shareholder and incorporator of SC Ltd. Services will be provided to that particular physician and/or others. SC Ltd. may advertise and solicit business from other physicians.

3. Following Incorporation SC Ltd. will enter into the following contractual agreements:

A. With a practising physician

By written agreement, SC Ltd. will undertake to provide any or all the following services to its customer:

(a) Leasing of premises suitable for the practice of medicine.

(b) Provision of necessary utility services.

(c) Hiring, dismissal and management of all paramedical, secretarial, clerical and maintenance staff.

(d) Provision at the going market rate of all supplies needed by the practitioner for the practice of his profession. The cost of such materials will not exceed that charged by any other retailer located in the area and selling similar supplies nor will the cost of these materials used directly by the physician in his practice be subject to the 15% fee referred to below.

(e) All bookkeeping services, the rendering of accounts and the billing and collecting of monies for professional services rendered.

(f) Appointment of any or all accounting and auditing staff.

(g) Purchase, own, finance and repair all office furniture and equipment, medical and non-medical, as well as other sundries used in the medical practice.

(h) Any other services which might be mutually agreed upon.

In return for receiving any or all of the above services, each contracting physician will agree to pay SC Ltd. in full for all expenses incurred by SC Ltd. in providing these services plus a management fee equivalent to 15% of the sum of these expenses incurred by SC Ltd. in providing the services listed.

B. With an appointed manager

Immediately after incorporation SC Ltd. will:

a) Appoint a manager. This manager say be the sole shareholder-incorporator of SC Ltd.

b) The function of this manager would be to manage the affairs of SC Ltd.: to hire, to fire, to manage, to organize and to delegate. The functions of the manager would not include the performance of tasks which were performed by employees of the physician prior to his contracting with SC Ltd. to provide similar services, nor would it involve substituting for such a person. The manager would only be required to manage the affairs of SC Ltd.

c) The manager of SC Ltd. would undertake to do the following:

i) Lease premises suitable for the operational needs of SC Ltd.

ii) Open and operate a bank account in the name of SC Ltd.

iii) Furnish the leased premises in a suitable manner.

iv) Arrange for appropriate utility services, including a telephone in the name of SC Ltd.

v) Have a suitable corporate seal made.

vi) Arrange for printing of stationery with the corporate name.

vii) On behalf of SC Ltd. negotiate and enter into all contracts with medical practitioners wishing to purchase the services of SC Ltd.

viii) On behalf of SC Ltd., negotiate and enter into contractual agreements with any and all individuals with whom SC Ltd. might need to contract for reasons other than those detailed in vii) above.

ix) Insure that all services that IC Ltd. has contracted to provide to any physician will be so provided in an efficient manner and with maximum profit to SC Ltd.

4) Any other services which might be mutually agreed upon.

In return for performing the above services, SC Ltd. will agree to pay the manager a salary. You feel that an appropriate salary for such a manager would be XXXX for every XXXX collected by SC Ltd. on behalf of physicians for professional services rendered by them; that is, physicians or a physician who has contracted with SC Ltd. to collect such monies on his behalf.

4. It is anticipated that in order to maximise SC Ltd.'s profit the manager will:

(i) Contract with XXXX to provide consulting services with respect to optimum management and organisation. The per annum consulting fee would be a sum equivalent to 0.5% of monies collected by SC Ltd. for professional services rendered by a physician or physicians who have contracted with SC Ltd. to collect such monies.

(ii) SC Ltd. will contract with XXXX to provide it with all necessary materials and supplies for retail to physicians who have contracted to purchase such materials, supplies and sundries from SC Ltd. It is anticipated that XXXX might, if appointed a consultant to SC Ltd. as in (1) above, agree to provide such articles at cost plus expenses. A profit would obviously accrue to SC Ltd. if XXXX because of economies attendant on volume purchased direct from wholesalers, was able to supply SC Ltd. with such materials, supplies and sundries at a cost lower than it would otherwise have to pay.

5. Purpose of the proposed transactions

The purposes of the proposed transactions are twofold :

(i) To maximize the profitability of SC Ltd.

(ii) To maximize the profitability of the management consulting division of XXXX

Opinion Given:

A. In our opinion the consulting fees incurred by SC Ltd. and paid to XXXX would be deductible in computing SC Ltd.'s income pursuant to paragraph 18(1) (a) of the Income Tax Act (the Act) provided the amount is reasonable in the circumstances. Based on the details given in paragraph 4 above, the amount does not in our view appear unreasonable.

B. Provided SC Ltd. operates, in fact, as a genuine business enterprise, it is our opinion that reasonable business expenses incurred by the physician to obtain the services of SC Ltd. which are necessary for him to carry on his practice would be deductible. In this regard, we recognize that SC Ltd. would be entitled to a reasonable mark-up on the actual cost to it of providing the services to the physician to cover its own overhead. In our view, a mark-up of 15% would not be considered unreasonable. The cost of providing a particular service may include the cost of the service or merely the cost of arranging for someone else to render the service depending on the circumstances in the particular instance.

Your payment of $250 included with your letter will be refunded under separate cover. We are prepared to consider a ruling request in connection with the above-noted type of personal service corporations provided that there is a specific taxpayer and actual proposed contracts involved.

Yours truly,

for Director Corporate Rulings Division Legislation Branch JF0/mj 18(1)(a) 67 245(1)